I’m happy to report we now have an answer to the age-old question of whether a tree falling in the forest makes a sound if no one is around to hear it. The answer is a resounding "yes!"
You might be wondering how I came to this conclusion. Well, after the bell Wednesday night Universal Forest Products (Nasdaq: UFPI ) reported first-quarter results which made quite the thud. Rather than screaming onto the scene and yelling "timber," shareholders ran for their hard hats. The company reported a quarterly loss of $0.19 on $387.2 million in revenue versus consensus expectations of a profit of $0.01 on $422 million. That translates into a large miss.
Universal Forest blamed last night's weak results on a perfect storm of problems: snowstorms on the East Coast, flat lumber prices, and a strong quarter from the same period last year that would be difficult to reproduce. Negative growth in its do-it-yourself and housing market segments also hampered Universal Forest’s margins, according to the report. In the past two weeks, lumber prices have weakened to their lowest levels in 2011. So is it time for shareholders to throw in the towel on this company? I’d say not quite yet.
Trading just a shade above one time its book value and coming up to Universal Forest’s strongest quarter historically -- the second quarter -- I feel it may actually be time to give this company a closer look.
The company had some incredibly tough past figures to beat in the do-it-yourself and home construction markets. The year-ago quarter had the benefits of the first-time homebuyer tax credit which artificially stimulated homebuying and renovation. As we saw with KB Home (NYSE: KBH ) recently, last year's comparisons will be tough, if not impossible, to top. The second-quarter should give us a better indication of where Universal Forest stands because the majority of that quarter will be sans the homebuyer tax credit.
Another reason to rethink running away from Universal Forest is the pending rebuild in Japan. Weyerhaeuser (NYSE: WY ) is the primary lumber provider to Japan, but there’s good reason to suggest that lumber prices should strengthen over the coming months after we get a better idea of exactly when and to what extent the rebuilding of Japan will begin.
We’re also entering the heart of hurricane season, which often leads to increased lumber usage. Most lumber here is used for preparatory purposes, but rebuilding can lead to a major jump in lumber prices.
Finally, we should consider how successful Universal Forest has remained despite a depressed housing market. Rivals Louisiana Pacific (NYSE: LPX ) , Bluelinx (NYSE: BXC ) , and Builders FirstSource (Nasdaq: BLDR ) all have trailing-12-month losses while Universal Forest has remained profitable on a yearly basis throughout this crisis.
Weather issues -- such as the East Coast snowstorms -- are a one-time unforeseen event. Stripping that out of the equation, it wouldn’t take much for Universal Forest to head higher given its strong management team and rich history of profits. Don’t write this company off as a has-been or “wood-be” just yet.
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